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Thursday, 21 January 2016

QK: CPEC a backgrounder

Exclusive to QK by S.Afridi.

This is an overview of the China Pakistan Economic Corridor (CPEC) timeline from its inception to the present.

Background:

Prior to drafting the 11th Five Year Plan (2006-10) in late 2004 the NDRC Task Force forecasted considerable obstacles to China’s growth. Despite bold targets for internal reform and the extension of commercial activities beyond China’s East coastal regions, a consensus emerged within NDRC’s think tanks that growth at 10+% would be unsustainable beyond 2010 and would taper down to below 7% by 2015 beyond which an average 3% growth rates would be ambitious. Despite the course of reform proposed in the plan to counter identified obstacles to rapid growth (local monopolies, uneconomic segmentation of internal markets, required consolidation for primary industries) there was a single prominent hurdle to China’s growth ambitions; Sustaining China’s energy consumption. China’s Primary Commercial Energy Consumption beyond 2030 raised alarming possibilities.

China’s foreign trade dependence grew from 40% to 64% and energy consumption had come at a high cost in inefficient resource consumption. Resource conservation, which became an important feature of the 11th Five Year Plan, though novel, would not allow growth targets to be met beyond 2010. The entire resource utilisation model had to changed before the 12th Five year Plan and the cost of resource consumption had to be lowered considerably (almost 17%) for central provinces (Sichuan, Shaanxi & Chongqing) to be ‘opened up’. The ‘guideline’ indicated the growth model had to change from being based on ‘growth by resource consumption’ to one driven by ‘growth through resource utilisation efficiency’. Access to economically advantageous primary resources became a central feature for future plans.

The Opening up of the Central Provinces of China and the provision of competitive energy to these provinces faces considerable geographical hurdles. Their link to the West passes through the narrow gateway of Gansu beyond which lies the Xinjiang and its main trade nodes, Urumqi in the North & Kashi/Kashghar in the South. Much like its other Asian economic rivals (Japan & S-Korea) of the 90s, China’s growth is dependent upon access to natural resources and minerals from outside its economic region. The most economically competitive resources lie further afield to China’s North (Mongolia & Russia), West (Central Asia) and South West (Iran & GCC). Without economically viable access to these resources China’s plans to ‘open’ its central provinces to sustain its rapid growth would falter.

Though other primary resources (financial-capital, human-capital etc) also formed a major part of the Five Year Plans referred to in the article the focus will be limited to the question of trade in energy and mineral related primary resources which are of the utmost importance to the area of focus.

CPEC Timeline:

Though the Karakuram Highway (KKH) was constructed during the 1980s, in truth neither the Chinese economy nor that of Pakistan was able to take advantage of KKHW for decades after its construction. On China’s part, the tense Western border with the Soviet Union made any real effort to develop its Western regions a non-starter. Xinjiang was viewed by Beijing through a security lens, not an economical one. The softening of Moscow’s direct grip, emergence of strong and uncompromising post-Soviet dictatorships in Central Asia with an under-developed resource base changed Beijing’s outlook and the rise of China’s internal market economies coupled with their resource consumption also assisted in the bringing a less combative stance on its Western border. As a result the task force for the 9th Five Year Plan (FYP) proposed a course of action to encourage a concerted effort by China to facilitate trade in base industry raw materials from its Western and Northern neighbours.
Meeting these goals of the 9th FYP manifested itself in China’s instrumental role in the creation of the Central Asian Regional Economic Cooperation (CAREC) with the ostensible goal to increase trade and cooperation between post-soviet central asian states however China’s investment in CAREC programs tilted heavily towards promoting and safeguarding base industry raw material imports from the region into China. This also accounts for the slow progress of CAREC on inter regional connectivity, other than with China, since its launch in 1997 with the assistance of ADB. Having established the treaties and bilateral relationships necessary for raw material imports from Central Asia, the task force for the 10th FYP proposed further investment into securing the import of natural resources through a structured and sustainable mechanism. This led to concerted efforts into constructing the West-East Pipeline System as part of the 10th FYP to form the bedrock of China’s future resource imports from Central Asia. The Taskforce for the 11th FYP proposed the acceleration of investments into the region post the completion of the first phase of the West-East pipeline project (in 2004). This manifested in the revamping of China’s role in CAREC which resulted in China raising the stakes by involving the European Bank for Reconstruction & Development (EBRD), Islamic Development Bank, United Nations Development Programme (UNDP), World Bank (WB) and the International Monetary Fund (IMF) in September 2004 to fund CAREC projects. The result was a concerted effort by CAREC, led by China, to provide a blueprint for future collaboration and regional trade in the form of CAREC’s Comprehensive Action Plan (2006).

These developments along with China’s bilateral and multilateral negotiations within Central Asia had not gone unnoticed by the then government of Pakistan which was involved in negotiations with China for a Free Trade Agreement (FTA) and which saw China’s growing focus and investment in Central Asia as an opportunity to propose a strategic partnership to China based on trade and extending China’s regionalism efforts to secure resources. The series of discussions between China and Pakistan during 2005 led to the formal acknowledgement of Pakistan’s offer to create a “Trade & Energy Corridor” between the two countries linking the Arabian Sea port of Gwadar to Kashghar/Kashi in China’s Xinjiang. Pakistan’s primary focus in these discussions was to open up Pakistan’s ‘National Trade Corridor’ (NTC) program for China’s investment and cooperation. The Chinese Embassy in Pakistan made the formal announcement to acknowledge the corridor and establish a set of “Early Harvest” projects centred around a bilateral free trade zone and the consideration of a ‘Trade & Energy Corridor’. Subsequent discussions between Pakistan and China from November 2006 onwards focused around numerous projects forming part of three separate programs.

The Three Programs:

1. Short-term (Early Harvest):
Utilise existing infrastructure development projects to build a land route linking two bilateral Special Economic & Free Trade Zones of Kashghar & Gawadar utilising, realigning & upgrading the existing KKH and link it to Pakistan’s Motorway Program as part of NTC.

2. Medium Term:
Establish a “Trade and Energy Corridor” by building a dedicated rail and land route from Gwadar’s Container Terminal to advance freight and commercial traffic to Kashghar. Build power projects focused upon the utilisation of Pakistan’s Coal reserves in Sindh and River water systems in Northern Pakistan.

3. Long term:
Build Oil, Refining, PetroChemical & Storage Complex at Gwadar, with Oil & Gas pipelines from Gwadar to Kashghar extending into the 2nd phase of the West-East Pipeline Complex in China and linking China’s Gas field investments in Iran to Pakistan’s PetroChemical Complex and Pipeline.
Establish a dedicated Freight Railway Route (including Oil Frieght) from Gwadar’s Container Terminal (& Petrochemical Complex) to Kashghar. This rail-link would be formally incorporated into CAREC’s dedicated Rail-Link for Central Asia. Further the program proposes to establish a link between the Eurasian Continental Land Bridge to Peshawar, with bifurcating offshoots from Quetta into Iran leading into Turkey/EU & Quetta into Kandahar leading into Central Asia.

In order to facilitate the utilisation of the Short Term Program, the NDRC task force constituted in November 2008 for the 12th FYP proposed ‘formally’ bringing Pakistan into the fold of CAREC and realign and incorporate Pakistan’s Planning Commission’s own National Trade Corridor Improvement Program (NTCIP) into CAREC’s Corridors. Pakistan was formally inducted into CAREC in 2010 and NTCIP’s Motorway Program was linked with CAREC to provide funding for its completion as an extension to CAREC’s Corridor 5. China State Construction & Engineering Corporation Limited (CSCEC) was tasked to conduct the feasibility study for completing Karachi-Faisalabad Motorway as part of NTCIP. A further proposal was made to link the two CAREC Corridor 5 nodes of Peshawar and Quetta with each other to facilitate resource extraction from China’s mining investments in Afghanistan and would also function as the parallel road route to the long term dedicated railway route and pipeline structure from Gwadar to Kashghar. Both the NTCIP Motorway program and the linking of CAREC Corridor 5’s nodes of Peshawar and Quetta were to be completed before the Mid-Term Review of the 13th FYP in August 2018.

For the Medium and Long Term Programs NDRC launched a formal study (2008-12) with assistance from the Planning Commission of Pakistan (with considerable work by National University of Science and Technology (NUST) Pakistan and Tsinghua University China) which was incorporated into a larger, more comprehensive study of extending China’s trade and resource import routes under the coming 13th FYP (later announced as the Silk Route Economic Belt initiative). In early 2013 the initial Feasibility Study & Preliminary Design for the Pakistan-China “Trade and Energy Corridor” from Kashghar to Gwadar was approved by NDRC and shared with the Government of Pakistan for its approval. The proposed route linked the upgraded KKH to Pindi Gheb and then Pindi Gheb to the NTCIP junction on the M8 motorway onwards onto Gwadar. Furthermore, Pakistan’s Trade and Energy Corridor was to linked with West to East routes in order to provide viable and economically competitive extraction routes into China’s investments in raw material fields within Iran and Afghanistan. Pakistan existing railway route, main line 2 (ML2), was to be upgraded and developed as the main route linking Gwadar to Kashghar. The target for the completion of the Trade and Energy Corridor was between prior to the Mid-Term review of the 14th FYP in August 2023.

In June 2013 a new government took office in Pakistan and Prime Minister Nawaz Sharif directed efforts to be made to bring completion times on the Trade and Energy Corridor forward to ensure project completion within 2017 and prior to the next General Election in 2018. The inability to provide firm commitment on 2017 completion times led to an alternative “Early Harvest” route being proposed to the Chinese government in the Prime Minister’s visit to China in July 2013, soon after taking office, to formally sign 25 agreements relating to the ongoing Trade and Energy Corridor. The amended proposal was to upgrade the existing National highway Five (N-5) to ensure completion of a viable route by 2017 and the upgrade of the existing railway Main Line One (ML1) to ensure completion by 2017. Pakistan also agreed to undertake the funding gaps for the amended proposals. Both the amendments ensured that the railway and road routes utilised existing infrastructure and passed through the Prime Minister’s electoral heartland, especially Lahore. The existing projects that formed the Short Term Program for the “Trade and Energy Corridor” were bundled together with the amended proposals and repackaged into a grand scheme labelled as the China-Pakistan-Economic Corridor (CPEC).

Though no formal announcement was made for the amendment to the N-5 route, maps had been issued by the Planning Commission and also through the various think tanks, including the Pakistan-China Joint Think Tank, showing the N-5 route beginning at the N-15 node at Hasan Abdal and ending at Khanewal, via Lahore, to be the main route for CPEC. During the subsequent year the PMLn government faced increased pressure in the Senate of Pakistan by the ANP, PPP and PMLq representatives to declare the formal route of CPEC. As part of the previous government some representatives from all three political parties are aware of the original negotiations with the Chinese government and the feasibility studies conducted by NDRC for NTCIP’s Trade and Energy Corridor. Before the Senate Standing Committee on Finance and Revenue the secretary of planning acknowledged that changes had been made to the original recommendations of the NDRC but had been done so on the request of the Chinese Ambassador and not by the government of Pakistan. The government of Pakistan suffered a setback after the Chinese Ambassador to Pakistan declined any role by himself or his government in any amendments. Shortly afterwards the Minister for Planning acknowledged the existence of three separate routes and that the government would concentrate on an “Eastern” route (via Lahore) to reap the benefits of Early Harvest Projects. After enduring a year of opposition and political pressure the government of Pakistan finally went on to publish maps for three separate routes;

Western Route: NDRC’s proposed linking of Corridor 5 nodes of Peshawar & Quetta with Gwadar (part of NDRC’s Short Term Program being funded through CAREC)

Central Route: Long Term Trade Energy Corridor as per NDRC study
(part of NDRC’s Medium Term Program)

Eastern Route: NTCIP’s Motorway program amended with an extension to Lahore (N-5 upgrade).
(part of NDRC’s Short Term Program with an amendment to link Lahore)

Despite efforts to amend the route to the Prime minister’s request, concerted opposition has ensured that CPEC would not follow the N-5 contour, from its intersection with N-15 at Hassan-Abdal, to Lahore. However the Lahore-Khanewal section of the amendment has been incorporated into the original NTCIP proposal.

In summary, after two years of trying to amend the original plans laid down by NDRC the PMLn government’s total contribution to the original short term program has been the inclusion of the Lahore-Khanewal stretch into the Motorway program and the inclusion of the ML1 railway upgrade.

Perspective:

Just to put things into perspective, CPEC is part of a wider picture. As part of the 13th FYP the Government of China has identified eleven (11) separate nodes for land based trade imports and between them they provide six (6) trade corridors. Pakistan is linked to a single (1) node out of eleven (11) and part of a single (1) trade corridor out of six (6).

Note: – the most ambitious and politically sensitive corridor in terms of its goal, extension & effect on Asia & the World’s Political Economy is the BCIMEC. It was originally proposed during the 2008 Task Force for the 12th FYP by the government of Yunan as a Third Eurasian Land Bridge. It is also the most unlikely to materialise as proposed.